(resulting in the economic equivalent of a current deduction of that amount paid for the building) 2.) Section 707(a)(2)(A) - will recast the contribution/allocation transaction into a sale between unrelated parties under Section 707(a)(1) *Thus, Section 707(a)(2)(A) requires capitalization of an item that the partners were seeking to immediately expense through the ruse of an allocation of income VI. VI. C HAPTER S S IX : S : S ALES ALES AND E XCHANGES OF P ARTNERSHIP ARTNERSHIP I NTERESTS A. Consequences to the Selling Partner 1. Generally : a. Entity vs. Aggregate Approach: 1.) Aggregate Approach - the sale or exchange of a partnership interest might be fragmented into sales of the partner’s undivided fractional interest in each asset. However, this would require a tedious asset by asset fragmentation of the sale 2.) Entity Approach - the transaction could be viewed as the disposition of a capital asset without regard to the character of the underlying partnership asset. The drawback to this is that it would facilitate the conversion of ordinary income into capital gain * Modified Entity Approach - what Congress adopted; it is a hybrid between the two b. Section 741 - provides that gain or loss from the sale or exchange of an interest in a partnership shall be considered as a gain or loss from the sale of a capital asset c. Section 751(a) - provides that a selling partner is to attribute “unrealized recievables” or “inventory items” as ordinary income 1.) Thus, Section 751(a) overrides Section 741, and it applies whether the partner disposes of his entire interest or only some portion of it. 2.) Section 751(a) converts would be capital gain into ordinary gain or loss 3.) Apply Section 751(a) first, then apply Section 741 d. Mechanics of Sections 751(a) and 741 : 1.) Step One - compute the total realized gain or loss on the sale pursuant to Section 1001(a) a.) Amount Realized = Cash + FMV of Property Received + Debt Forgiven b.) The adjusted basis of the seller’s interest is his outside basis under Section 705(a), adjusted to reflect the seller’s pro rata share of partnership income or loss from the beginning of the current taxable year *Determining the Applicable Taxable Year: - Partner Sells Entire Interest: Immediate - the taxable year of the partnership closes with respect to that partner immediately. The income or loss arising from that short taxable period passes through to the partner and is reflected in his outside basis - Partner Sells Partial Interest: End of Year - the partnership year does not close, but the selling partner’s distributive share of income or loss is determined by taking into account the partner’s varying interests in the partnership during the taxable year 2.) Step Two - determine what portion, if any, of the seller’s total realized gain or loss is characterized as ordinary income under Section 751(a) a.) This amount is the difference between the portion of the amount realized allocated to Section 751 assets and the partner’s adjusted basis in those assets b.) Definitions: - Unrealized Receivables: Section 751(c) - include rights (contractual or otherwise) to
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- Corporation, Types of business entity, Taxation in the United States, partner